Getting Into Debt

Financial counselors should gain insight into why their clients are in debt in the first place. This will help them pinpoint financial stumbling blocks and adjust their spending habits to a sound financial plan.

 

Debt is a result of easy access to credit and savvy credit offers that give the illusion of getting something for nothing. Technology changes quickly, and consumers must purchase a new computer system every 18 months.

 

Many Americans no longer have the ability to save for financial setbacks. The psychology of spending can be used to predict negative outcomes and identify specific obstacles to financial health. By understanding the psychology behind debt, counselors can help clients achieve control over their financial futures.

 

Juliet Schor identifies several "neurotic" spending styles, including competitive spenders who aggressively try to establish and maintain status by keeping up with their particular "reference group". Other spending styles include compulsive spending and co-dependent spending. The problem with categorizing people as neurotic spenders is that it serves to pathologize consumers as somehow mentally unable to manage their finances. Instead, it is important to explore the various psychological motivations behind overspending.

 

Some beliefs about money are products of our childhood, such as being told that money is the root of all evil. Others believe that money can be a tool for creating financial freedom. Predatory lenders exploit vulnerable groups by charging high interest rates and excessive fees, and can lead to foreclosure, eviction, and homelessness. Predatory lending includes both technically legal but high cost loans and outright fraud through deceptive sales practices. It involves exploiting a consumer's ability (or inability) to repay, charging high interest rates and fees, and not charging a rate that is proportional to the risk assumed by the lender. Predatory lenders encourage borrowers to refinance their existing loans into bigger, longer-term loans at a higher interest rate. Payday loans are short-term, single payment loans issued at the date of next paycheck. Each state has its own regulations for payday loans. Tax refund anticipation loans are similar to payday loans, but instead of anticipating a paycheck, borrowers are anticipating a tax refund. Predatory lending preys on lack of financial literacy and consumers' emotions. Clients should evaluate wants versus needs when borrowing money, and understand the motivation behind purchases and borrowing.

 

A hundred years ago, salary lenders offered one-week loans at annual percentage rates of 120 percent to 500 percent, which are similar to those charged by payday lenders today. State policymakers undertook an effort to suppress salary lending while also seeking to facilitate the expansion of consumer credit from licensed lenders. By the middle of the 20th century, a mass-market consumer financial industry was emerging, and federal banking law developments eased regulations on federally insured depositories, mortgage lenders, credit card lenders, and other financial companies.

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The Supreme Court ruled in 1978 that national banks could charge interest rates based on the laws of the state where they were physically located, and payday lenders set up shop in friendly jurisdictions. During the 1980's, federal deregulation had a profound impact on industries ranging from airlines to utilities and even to banking. This law allowed state-licensed payday lending stores to flourish, and today, several federally chartered banks are offering "deposit advance" loans. Though federal law remains mostly silent about payday lending, the Talent Amendment to the 2007 Defense Authorization Bill and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 are changing this situation.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the Consumer Financial Protections Bureau, which was given the authority to regulate payday loans. The Talent-Nelson Amendment to the John Warner National Defense Authorization Act of 2007 limited the permissible annual percentage rate and created structural requirements for certain small dollar loans issued to members of the armed services and their dependents.

 

If your client has a gambling problem, you can learn more by visiting the website of the National Council on Problem Gambling or by calling them at (800) 522-4700. Financial difficulties most frequently drive gamblers to seek counseling, but the problem goes beyond personal finances. Active problem gamblers need to confront their behaviors first. If you lose time from work, have negative effects on your home life, feel remorse after gambling, feel an urge to "get back in the action", have borrowed money to pay for your gambling, have sold anything to finance gambling, have committed illegal acts to finance gambling, etc., you may be problem gambling.

 

The imprudent are consumers who have no money put away for a rainy day and live one day at a time without any financial goals. They are often hit by setbacks that destroy their lifestyle, assets, and credit. Keleghan suggests that different methods are needed to help settle accounts for each of these types of debtors. The imprudent and naive debtors may need help with being proactive with their financial goals and learning more about lender policies.

 

Many young people in debt express dismay and fear, while older debtors may take their debt more personally and express embarrassment or humiliation. Outstanding debt causes stress and distress in every aspect of an individual's life. A visitor to Japan asked the elderly proprietor why one cup of tea cost one dollar while another cup cost $100. The old man said that the price difference was because the higher price cup cost more tea.

 

Many people go clothes shopping to make themselves feel better. They hang the clothes up in the wardrobe and never wear them, because they are consumers of the experience only.

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